Chapter 7 Bankruptcy Usually Will Not Stop Ongoing State Court Litig...

There is some confusion about the automatic stay; some debtors don’t anticipate exceptions to the effect of bankruptcy upon their creditor actions. Bankruptcy stops collection of debts, but bankruptcy does not always stop creditor’s ongoing lawsuits to establish a judgment and their right to collect money from the debtor.

I read about a Florida case where a married couple filed bankruptcy primarily to stop the progression of a state court lawsuit filed against them by a disgruntled investor who lost money in an investment organized in part by the debtors. Their bankruptcy attorney told them that filing Chapter 7 would stop the lawsuit, which it did. The problem was that nine days after the bankruptcy was filed the plaintiff in the state court proceeding filed a motion to lift the stay in order that the state court case could proceed to conclusion. The debtors had to hire a second bankruptcy attorney to defend the motion to lift the stay because their first bankruptcy attorney did not handle contested bankruptcy matters.

The bankruptcy court held a hearing within a few days on an emergency basis, and the court dissolved the automatic stay as to the state court lawsuit.

Bankruptcy courts will usually not stop ongoing state court litigation. Bankruptcy courts do not want to substitute themselves as a forum to litigate claims brought  under state law. Debtors should not file bankruptcy to change the forum of their ongoing civil disputes from state court to the bankruptcy court room.

If and when the state court proceeding results in a judgment against the debtors the debtor’s bankruptcy will stay effort to execute the judgment against the debtors’ property. The bankruptcy trustee will liquidate the debtors’ non-exempt assets and distribute the proceeds proportionately among all the debtors’ unsecured creditors. 09-36566-bkc-jko Southern District Florida